Financial Aid: Finding Better Ways to Help College Students

Earlier this week, my Tax Policy Center colleague Elaine Maag blogged about proposals by the Center for Law and Social Policy (CLASP) to improve federal assistance for low-income college students, including better targeting of higher education tax credits. But there may be even more effective ways to help these students. One idea: Cut back on tax credits and use the savings to improve Pell grants and loan programs.

As part of the same broad initiative that generated the CLASP plan, I was one member of a group of experts assembled by HCM Strategists to reimagine financial aid. Our aim was the same as CLASP's, but our proposals took a different tack: Refocus and simplify the whole federal financial aid system including federal grant, loan and tax programs so they work more effectively and cost-effectively.

We started by acknowledging that Congress has greatly expanded federal support for higher education-doubling the amount spent on both Pell grants and tax credits-but there is little evidence that all those extra dollars have similarly expanded the number of college graduates. Almost half of all undergraduates receive a Pell grant but Pell recipients are half as likely to get a Bachelor's degree within six years as those getting no assistance. And while federal aid has made college more accessible to minority students, it has done little to improve their graduation rates. We concluded there must be a better way and suggested four reforms:

Simplify the aid process. We would replace today's myriad of programs with one grant program and one loan program and make it possible for students to apply with a simpler application. Grants would be targeted to those who most need aid, and students would be encouraged to take more classes each semester-a step that raises graduation rates. Loans would be consolidated into a single program with common annual and aggregate limits for undergraduates and repayment based on income levels. For all students, the financial aid form would be automatically pre-filled with IRS data, with a small set of students needing to enter more information. By consolidating the application process to rely more on tax return information, the Department of Education could also require better reporting of education costs to the IRS, information that is currently reported on a haphazard basis.

Replace the current tax credits with one tax credit for both college and lifetime learning. Currently we offer numerous tax benefits for higher education including three different credits or deductions for college costs. These credits do little to increase enrollment, largely because students often must pay tuition long before they receive the tax credit (usually in April when they file their return). Students also sometimes choose the wrong credit. Under our proposal loans and grants would provide most support for undergraduate education, but there would also be a tax credit for a broader set of post-secondary options. That credit would recognize that we are moving beyond traditional models of higher education that involve nineteen year olds attending college full time. It would help workers pay for classes that teach new skills, allow students some help in attending school part time, and could be used to pay for an evaluation of on-line learning as programs evolve.

Promote shared responsibility. Students would be encouraged to graduate sooner in part by limiting the amount of time during which they can obtain grants and loans. College applicants would receive both clear financial aid packages and a scorecared that shows how the school performs. This would help students make informed decisions on what schools to attend.

At the same time, institutions would need to do a better job reporting information about both their entire student body and how students do in school. Instead of the current cohort default rates used to determine institutional eligibility for federal financial aid, we propose using a more comprehensive assessment of performance with a new Institutional Effectiveness Index. Comprised of threes measures the index would include the number of Pell recipients attending the school,on-time graduation rates (adjusted for student characteristics if possible) and loan repayment rates. If schools fall in the bottom 10% for two of three measures, they would lose access to federal higher education funding.

Improve the quality of data and create pilot programs. Some of the savings from these proposals would then be used to support pilot projects and collect better information. Pilots could seek more cost-effective ways to prepare students for college before they enroll, ways to award aid based on competencies gained and not hours spent in class, and examine alternate ways of distributing aid.

Of course, streamlining aid and federal assistance requires funding streams that best achieve national goals. In practice reform could run aground against the Congressional committee system with different committees controlling the grant and tax programs. Federal funds can be an important tool to help low-income students get to college and, most important, graduate. But we need to use those dollars in a smarter way.